Analysis: How rich is Saudi Arabia? Kingdom does the math in balance sheet overhaul

By Barbuscia Davide

DUBAI (Reuters) – Saudi Arabia needs its finances demystified.

The Kingdom is working to establish a consolidated balance sheet, composed of things actually omitted from the accounts of the oil-rich economy, including investment and debt of its strong sovereign wealth fund.

The key aim of this agenda is to provide a financial equivalent of an MRI in the government's budget, a spokesperson of the Finance Ministry told Reuters, noting that this will cover 'off-balance sheet' assets and liabilities.

The Crown Prince of Saudi Arabia and de facto leader Mohammed bin Salman has put the Public Investment Fund (PIF), Saudi Arabia's largest sovereign wealth fund, at the forefront of restructuring to diversify the world's top oil exporting economies from fossil fuels.

Under Prince Chairmanship, PIF has converted a sovereign wealth fund into a multinational investment vehicle that makes multibillion dollar bets on hi-tech firms like Uber and other stock investments and committing tens of trillions to Japanese Softbank assets.

Its financial accounts are not released and are not freely accessible through the Kingdom budget.

The Gulf countries generally don't disclose statistics on their total debt and reserves, but certain analysts are concerned with the PIF's risky investment profile and influx of state financing.

"Transfers of wealth from liquid pools of assets like central bank reserves into PIF's less liquid (and less transparent) investments increases the overall risk profile of the public sector balance sheet," says Fitch's analyst of the sovereigns, Kirjanis Krustins.

"Debt investors would tend to see the government and its key government related entities such as PIF as representing substantially the same risk. Thus the levering up of the broader Saudi complex could at some point impact the government's own borrowing costs," he said.

A request for comment has not been received by the government media office.

BILLIONS ARAMCO

In the second half of last year, the government began working on the so-called SALM framework and its speaker said it was a 'long-term initiative' with no decision on when and how its findings will be disclosed.

"If we use benchmarks we will see countries spent a couple of years to implement the consolidation phase," he said of the initiative.

The finances of the PIF are formidable.

Its holdings were up to 400 billion dollars as of 2020, compared with 150 billion dollars in 2015, with a planned $70 billion payday from the state oil firm Saudi Aramco for PIF's involvement in a petrochemical giant and a move from the foreign reserves of the central bank of $40 billion.

It has received almost $30 billion in proceeds from the initial public offering made by Aramco in 2019.

Around 2018 and 2019, the Fund raised $21 billion in loans and is completing a new facility that is estimated to hit over $10 billion, reports say.

The Normal Way The Normal Way

Despite the oil riches of Saudi oil, the production of enough employment for the young people of the Kingdom is one of the main challenges for Prince Mohammed, known in the West as MbS.

Since 2016, the government has been promoting economic policies to build millions of jobs and slash unemployment to 7% by 2030.

Yet fiscal austerity has slowed down spending to reduce a pregnant deficit, and last year, the coronavirus epidemic forced unemployment to a historic 15.4%.

Riyadh cut capital expenditure by the end of this year, dragging the deficit down from an eye-watering 12 percent of GDP last year to a deficit of 4.9 percent.

Instead, it uses the PIF to finance some of the big construction ventures, including the NEOM, a $500 billion high-tech business area, and a newly proposed "The Line" a carbon-free city of one million inhabitants in NEOM, which is estimated to cost between $100 billion and $200 billion.

Prince Mohammed said that by 2025 PIF plans to add at least 150 billion riyals (40 billion dollars) annually to the local economics and raise its reserves to 4 trillion riyals (1.07 trillion dollars).

"MBS understands that unless the economy grows at a rate above 6.5-7 percent , the youth unemployment rate will stagnate or grow – and that is a ticking time bomb," said Khaled Abdel Majeed, the MENA fund management firm at SAM Capital Partners, an investment consulting firm in London, speaking on state funds moved to the PIF.

"Doing things the 'normal' way through 'normal' channels will take more time than is available."

(Davide Barbuscia reporting, extra Tom Arnold reporting; Carmel Crimmins editing)